Vulture Funds trump Argentinian sovereignty

The U.S. Supreme Court’s refusal to review a case in which vulture funds sued to make the Argentinian government pay them 100 percent of the value of bonds, which they purchased for a fraction of the face value, let stand a lower court ruling requiring the bonds be paid in full. Reuters reports that Aurelius Capital Management, one of the lead holdout creditors seeking to settle with Argentina over sovereign debt payments from its 2002 default, said on Monday the government faces a new crisis on July 30 unless it engages in serious negotiations. Argentine officials and the holdout investors met separately, with a court-appointed mediator on Friday emerging from his offices after five hours of discussions with no resolution and no further talks scheduled. Both sides have ramped up the rhetoric to explain why they are, on one level, equal to eager to negotiate and, on another, at pains to show why the other side is not engaging. Quote:

“‘Absent a deal, Argentina’s next sovereign debt crisis will start on July 30. There is still time to avoid that outcome, but only if the Argentine government commences serious discussions with us immediately,’ Aurelius said in a statement.

“The firm said that together with other holdout creditors, it has offered to meet with the government anytime, anywhere, but has been rebuffed.

“‘Argentine officials refuse to meet with us or even negotiate with us directly. Sadly, this approach gambles with the livelihoods and futures of the Argentine people.’

“In 2012, U.S. District Judge Thomas Griesa in New York awarded the holdouts $1.33 billion plus accrued interest in a case based upon the pari passu, or equal treatment, clause used to sell the bonds originally in 1994.

“Without a deal, Latin America’s No. 3 economy risks tumbling into a new default on July 30”.

Now joining us to talk about all of this first of all in Buenos Aires in Argentina is James Henry. James is a leading economist, attorney, investigative journalist. He’s written extensively about global issues. He served as chief economist at the international consultancy firm McKinsey & Company.

And also joining us from New York is Michael Hudson. He is a distinguished research professor of economics at the University of Missouri-Kansas City. His upcoming book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

JAY: So, Michael, don’t you feel better about the whole debt crisis, knowing that Aurelius is so concerned about the fate of the Argentine people?

HUDSON: Well, this has really divided the world into two halves. The ruling that’s under Judge Griesa’s judgment today basically prevents not only Argentina but any country that’s issued bonds in the New York market from ever writing down or renegotiating the debt. Seventy percent of the sovereign bonds of governments throughout the world are issued in New York (about 22 percent are in London). And for those 70 percent, you’re going to have countries like Greece and others, Latin America in the 1980s, that have to write down the debts. If you don’t write down the debts to something that can reasonably be paid, they’re going to have to end up looking like Ireland or Greece. They’re going to be imposing a decade of austerity on themselves. And no country is going to commit financial suicide. So Judge Griesa has apparently told the Argentines, come to New York to negotiate under the rules that I’ve said, which are different from all the other countries’ rules. And there is no possible way that Argentina can obey his orders without essentially committing suicide for the economy.

JAY: Right. Okay. James, let me see if I just have the basic fact base correct. On July 30, Argentina was supposed to pay interest payments to the 90 percent of bondholders that agreed to the restructured debt, which I think was something like about $0.30 on the dollar. But about 10 percent of the bondholders refused to restructure. These vulture funds then bought these bonds at a fraction of the face value, but then sued to get paid the entire amount. And the judge has actually said they should get the entire amount. Now, on July 30, the judge says they can’t make their payments to the restructured bondholders until they pay off this $1.8 billion or something to the vulture funds. Is that–do I have it right?

HENRY: Yeah. Essentially, the vulture funds like Elliott, which is a Cayman Island-based fund, in 2008 they bought whatever Argentine bonds, restructured bonds they own for $48 million. And today they’re claiming not only the $1.3 billion that Griesa awarded them, but, beyond that, interest that’s accumulated since then. So the total for Elliott and the immediate parties, holdouts, is something like $1.65 billion–quite a profit compared with the $48 million they invested five years ago.

In addition to that, Argentina has another $15 billion of holdouts that it believes would come in if this kind of behavior holds up. And those people are already beginning to file suit.

On the other hand, since they have on the order of $140 billion of debt that they have restructured, including $80 billion that was restructured 2005 and 2010 at a 40 percent discount, if they have to now go back and put themselves back in essentially deeply in debt to pay these vultures, it just stands on the head.

Basically, we have no mechanism for handling country debt the way we do for private sector bankruptcy. And the IMF tried to suggest a system back in the early 2000s. The world just didn’t go for it. As a result, we have this cockamamie system where a New York judge is making rulings based on sort of 19th century concepts of contract law. And he only has jurisdiction in this case because Argentina is one of four Latin American countries–unlike Brazil–that has decided to choose the Southern District of New York, one of the Wall Street safe havens in terms of the federal judiciary, as the location for ruling on all of these cases with respect to Argentine foreign debt.

It has a history of ruling against debtor countries. It’s totally repealed the doctrine of champerty, which is a doctrine of the law that says that you can’t go out and buy somebody’s debts up and then just take them to court and sue just because you’ve become a creditor. But the judges in the Southern District of New York tossed that out in the late ’90s. And this is one of a series of vulture cases where companies like Elliott have been going around the world, countries like Panama and Nicaragua and Peru, and basically leveraging the fact that they have friendly judges in the Southern District of New York like Judge Griesa.

JAY: James, do we know how much interest these bonds–in ’94 when they were first issued, how much interest they were paying?

HENRY: Well, the bonds have paid variable interest depending on the time of the year. In 2001 they got up to 15 percent interest.

But if you go back to the sordid history of the Argentine debt, that’s the other thing that’s really quite disturbing here. As of 1976, Argentina had a total foreign debt of $18 million, 17 percent of GDP. The military came in in ’76 with U.S. government support, established a junta. By 1983, the debt had soared to $48 billion–by a factor of seven. And no one has ever audited that debt. There’s–and, interestingly, there’s a U.S. legal doctrine called odious debt which says that if you have a debt that’s contracted by a military dictatorship, it doesn’t necessarily have to be honored. We invoked it with respect to Cuba in 1898. It had acquired a lot of loans from Spain, and nobody could account for where they were. But this odious debt doctrine had never been applied to Argentina.

Interestingly, the other thing is that this choice of jurisdiction was originally chosen by this military junta back in 1976. Martínez de Hoz, the finance minister at that point in time, a very conservative guy, decided that Argentina would waive its sovereign immunity for purposes of all this debt that it was beginning to accumulate and allow the United States and the Southern District of New York to be the [siphus (?)] for all of these cases. So those two very fundamental changes made by, essentially, a military government, first of all blowing up the debt out of proportion, and then relocating the judiciary outside of Argentina, is very important for what we’re seeing all the way forward to 2014.

JAY: Right. Michael, it seems to me a little ironic or something. You know, you pay, you earn 10, 12, 15 percent. I mean, the reason you’re earning those kinds of money on government bonds is ’cause you’re acknowledging risk. If there’s no, ever, a risk of default, then why should you be paying? You could /ˈpeɪbi/ inflation, but not any more. So, I mean, the judge is saying there should be bonds that can pay high rates of interest, but there should be no risk.

HUDSON: That’s–there should not be any suffering as a result of risk. In other words, anybody can buy a discounted bond, and you have Third World countries always paying a premium over what the United States government has to pay, just like you have companies paying high for junk bonds. Essentially, Argentina was like a junk-bond country.

The history that was just said is very important. You had the U.S.-backed military dictatorship that ran the debt up into 1983, but then, in 1989, you had another neoliberal takeover with the Washington Consensus, and they adopted the U.S. dollar as their basic monetary reserves and tied their money supply to the dollar. That essentially drove the country into debt because it brought on an economic collapse by 2002. That’s why the government was voted out and why the Kirchners came in. So you have a destructive neoliberal government coming in, driving the country into debt, ’cause that’s what neoliberals do.

And then, 2002 (and it was just mentioned), the IMF said, look, we’re going to need something like the Bank for International Settlements was set out to do in 1929, to settle German reparations (obviously, Germany couldn’t pay the reparations that it had to). We have to have some international forum to decide how much a country can pay without imposing austerity and depression on its population, ’cause every country’s sovereign. That’s why they call it sovereign debt.

Well, the United States at that time, in 2002, blocked this and said, wait a minute, other countries want an international forum, but we’re going to block the IMF from doing that, because if they do that, they’ll write down the debt, and most of the bondholders are Wall Street, and we want to get every penny these guys want, and we don’t want.

Well, ironically, after Judge Griesa’s ruling threatened to throw the whole international bond issue into anarchy, the U.S. Treasury and the government and the French government and the IMF all filed amicus brief cases with the Supreme Court, saying, if you follow Judge Griesa’s ruling, it’s so wrong it treats Argentina as if it’s a family restaurant that’s just gone broke, and now let’s carve up all the little pieces and pay off. If you treat countries like you’d treat a family restaurant, then no country is going to ever again say, we’re going to agree, if there is a dispute, to settle the rules under the laws of New York, because if you settle the laws under New York bankruptcy, you’re going to have a nutcase like Judge Griesa saying, I don’t like Argentina, Argentina doesn’t pay its debts, I’m going to make it pay all the 100 percent money it owes as if there were no risk, and all of the interest, the 15 percent, you said, compounded year after year, and all of the legal fees that–the hedge fund has gone after 900 attempts to grab Argentine property, including their Naval training vessel, ARA Libertad, and now it’s trying to grab the shale oil in Argentina, and I’m going to give you penalties because I don’t like Argentina. So when the judge says, Argentina, send up your people to negotiate on my terms or I’ll find you in contempt of court, Argentina says, no country could possibly negotiate on your terms. We overthrew the military dictatorship. You are not going to do to us what the military dictatorship did, Judge Griesa.

JAY: Right. Right. James, why doesn’t Argentina raise the concept of odious debt? Didn’t Correa in Ecuador do that in 2008 and actually use that to restructure some of the debt there?

HENRY: Yes, they did. I mean, Raúl Alfonsín, who came to power in 1984, raised the issue of odious debt for 21 days, and then, at the end of that 21 day period, he reversed himself. That’s the last time we ever had a serious discussion of auditing the Argentine debt. So President Alfonsín must have gotten the message from international banks, who have long treated Argentina as a huge source not only of lousy lending but also capital flight, something like $300 billion of offshore private capital outside of the country.

The irony is, as Michael just said: I think this has actually been one of the most successful examples of debt restructuring that we’ve ever seen. The Argentine economy performed extremely well from 2005 until 2009 after it restructured the debt, growing at 5 to 7 percent a year. It’s had some difficulties in the last three years, but nothing like what was it going through in 2000 and 2001, when you had 40 percent of the people below the poverty line, you had 18 percent unemployment, you had the neoliberal, my classmate, Domingo Cavallo, running the economy, and he blew the debt up from about $90 billion in 1999 to $144 billion by the time he left office.

JAY: James, it should also be added that it’s not just the dictators. It was the dictatorship, you could say, of the IMF and the whole restructuring that took place that preceded this default, was it not?

HENRY: Well, I think it was kind of that plus the militant neoliberal [crosstalk]

JAY: Yeah, that’s what I’m talking about. Yeah.

HENRY: –was really, you know, convertibility. Convertibility of the dollar into the peso became an iron law. If you basically say that you can’t devalue your exchange rate in order to grow the economy and you’re running budget deficits and you can’t borrow, you’ve taken away all of the levers except cutting spending, and there just wasn’t that much spending to cut.

JAY: James, just quickly (we’re getting near the end of this), July 30 is just a few days away. What do you think’s actually going to happen?

HENRY: Well, Argentina doesn’t really have a plan B. My guess is that–this is quite a complicated story. Default doesn’t automatically occur. It takes 25 percent of the creditors, in this case those who would be entitled to the $140 billion, to actually declare Argentina in default. Furthermore, many of the payments that Argentina’s making are to bondholders who are in Europe or have peso debt. About 60 percent of these bonds are actually owned by Argentinians, and they’re accepting pesos, and those have been cleared through the custodial banks that are handling those payments. It’s basically the 29 percent of the bonds that are owned by U.S. that are being paid in dollars–they’re dollar denominated–that are really the subject of a possible sort of partial default here.

I think Argentina actually has quite a bit of–it can try this notion that’s been bandied about of inviting bondholders to come in and accept payment outside of the United States in other currencies, or even in dollars in Argentina. And if it did that carefully, the value of those bonds would of course plummet, but Argentina could do what Ecuador did, which is to buy up some of the bonds at a discounted value. Maybe that would cost them less than they would have to pay to these holdouts, who have maybe $15 billion in debt.

So I think there’s not going to be a cliff here. It’s going to be a messy process, but I doubt that you’re going to see these vultures at the end of the day able to get Argentina to pay them. Now, they may well have sold–the smart money says that these guys have already essentially insured themselves, they bought credit default swaps, CDSs. And so whether or not those CDSs come due at the date of July 30 is an interesting legal question. But it may be that these vultures are really mainly interested in collecting on those credit default swaps. We’ll just have to see.

But the big picture is that Argentina is not about to go back into $140 billion in debt in order to simply satisfy people who bought their bonds for $48 million in 2000.

JAY: Michael, just a quick final word. What message does this all send to other countries around the world about how they might deal with vulture funds?

HUDSON: Well, the ruling of Judge Griesa now is a precedent for any country that tries to renegotiate its debt like Greece negotiated its debt downward. And the problem is that, as the United States argued against Greece’s ruling, saying, wait a minute, this means that no country that issues bonds in New York or has a new bank as a paying agent–and if they pay in dollars, it has to go through some New York bank–no country can write down the debt anywhere in the world.

So this goes way beyond Argentina. This is only–you have a case of the tail wagging the dog. And that’s why everybody from the U.S. government to Europe was insisting that the Supreme Court overruled Judge Griesa’s ruling. And the Supreme Court said, wait a minute, since the ruling is only local New York State bankruptcy contract law, it’s not a national law and a constitutional law, so we don’t have any ground to review it. And the other people said, wait a minute. It may be, of course, it’s local law, but we’re dealing with an entire country and international relations, and the international relations means that other countries will now shun the New York and the dollar market for bonds, and there goes Wall Street.

And the other aspect of Wall Street, as you just mentioned: many people have been speculating over how much credit default swaps have Singer’s vulture funds bought? And the idea is, okay, this is like John Paulson buying junk mortgage default swaps and making $1 billion off–believing that the junk mortgages would go bust. Well, the problem with these credit default swaps and Argentina is who’s on the other side. And the belief is that–. Who is on the other side of credit default swaps? It’s the ten largest New York banks. So Citibank, Chase Manhattan, Bank of America, they’re on the other side of these credit default swaps, and they’ll take a huge loss if indeed there is a default. So everything has ratcheted up into a potentially explosive situation.

HENRY: Paul, let me just make one more comment.

JAY: Yeah, go ahead, James.

HENRY: I could say, just to end a positive note, last week not only did Argentina almost win the World Cup, but the Chinese premier came to Argentina with 200 business executives, and he is setting up a $7.5 billion project lending facility plus a $11 million currency swap facility. Chinese companies are looking seriously at investing in farms, farmland, grain production, and in the shale oil deposits that Argentina has, which are larger than the United States’, potentially.

So this country has great future, and I think it’s disappointing for the United States not to be able to behave in a more professional way toward Argentina, one that values this long-term relationship.